OPEC split over increasing oil production

Minister of Energy Mohamed bin Dhaen Al Hamli from the United Arab Emirates is surrounded by journalists as he arrives a hotel for a meeting of the Organization of the Petroleum Exporting countries, OPEC, in Vienna, Austria, on Tuesday, June 7, 2011. (AP Photo/Matthias Schrader)

VIENNA - Mideast turmoil, a faltering world economy and divisions on whether to raise crude production promise to make today's OPEC meeting one of the more volatile in recent history.

In the end, the 12-nation group will probably opt to increase output levels to reduce international concerns about the high price of oil. But some influential members are looking to raise the cost of crude.

That level is at or above present prices and is considered too high by major oil-consuming countries struggling with their economies. And it goes against efforts by OPEC kingpin Saudi Arabia to push prices downward.

OPEC oil ministers usually face easier choices at the regular meetings, where they seek agreement on how much to pump and sell to the rest of the world. But the mixed signals ahead of today's session are making decisions difficult.

The unrest in Libya and Yemen threatens to destabilize larger oil-producing nations in the region. The two countries normally produce less than 4 percent of the world's oil needs, and Saudi Arabia and others have boosted output to make up for much of the shortfall. But worries that the violence could spread to bigger producers and seriously cut into world output has caused jitters, both from crude exporting nations and from the U.S., China and other consumers with huge energy needs.

Kuwait's oil minister, Mohammed al-Busairi said, markets are being "hugely affected" by the unrest in Libya, in an interview with the official Kuwait news agency KUNA and Kuwait TV.

The shaky state of the global economy is another wild card in this week's talks.

Weak housing and employment reports from the United States added to the gloom spread by Europe's attempts to bail out governments and Japan's post-Fukushima meltdown. At its present price of around $100 a barrel, benchmark crude may be too expensive for nations struggling to make ends meet, worsening the economic picture and leading to less oil demand.

But with sputtering economies using less energy, raising output to lower prices could also flood the market, leading to a surplus that could drive prices below $80 a barrel. Even that benchmark, which is preferred by the Saudis and other moderate OPEC members is considered too low by price hawks Iran and Venezuela.

Analysts noted there is much at stake but that the conflicting signals facing the ministers are creating uncertainty.

Johannes Benigni of JBC Energy called today's OPEC meeting "a key event ... (that) could in fact be the most important (OPEC) gathering of the decade."

IHS Energy analyst Catherine Hunter described it as "one of the most challenging sessions for some time, both in terms of gauging market fundamentals and in navigating the inter-group politics."

Against such a backdrop, OPEC - which accounts for about a third of the world's oil supplies - cannot be seen as indecisive. Ehsan Ul-Haq, with KBC Energy Economics, said the world "would like to have a clear signal" from OPEC that it is ready to steady markets and ease concerns that prices will head even higher.

The 11 OPEC members are already exceeding their current production quotas. Their output is an estimated 26.15 million barrels daily - about 1.3 million barrels above the daily overall OPEC production target of 24.85 million barrels a day agreed two years ago.

That sets the stage for what would be a relatively painless decision - the meeting could opt to raise the output ceiling to actual production levels of around 26 million barrels a day. Add to that the daily 2.7 million barrels produced by Iraq, which is not bound by quotas, and OPEC could be bringing more than 29 million barrels a day to the market.

JBC Energy head Benigni expects a similar scenario. He forecasts OPEC production will be around 30.5 million barrels a day by late 2011, assuming that member nations produce above their individual ceilings, as usual.

Once again, the Saudis - who account for around a third of OPEC production - will be the main champions of hiking the production ceiling to drive prices down, in line with their view that crude should be fetching between $70 and $80 a barrel. Opposing them is Iran, OPEC's No.2 producer, which argues that world inventories are already high and an increase in output targets would lead to a glut and a corresponding price drop.

"There is no need for any increase in production output by OPEC," Mohamad Ali Khatibi, a senior Iranian OPEC delegate, told Iranian state television Monday.

While the Saudis are supported by Gulf nations, the weak U.S. dollar could generate some backing for Iran. Oil is priced in dollars, meaning that producers lose every time the greenback slips in value.

Ul-Haq notes that both Iran and the embattled government of Libya - which has little sympathy for the U.S. and other western oil consumers backing insurgents seeking to topple Moammar Gadhafi - will be sending new ministers to the meeting.

Both are expected to be entrenched price hawks. That, says Ul-Haq, "could result in very long discussions between the group headed by Saudi Arabia and the group headed by Iran."